Market timing is extremely difficult, evidenced by Stanley Druckenmiller’s conviction last year to short the dollar, only to be taken aback when the dollar index rose more than 2%. An August report from Morningstar reiterates how hard market timing can be, and shows the wide discrepancy between investment funds’ total returns and the average returns that investors actually receive, cites an article in the Financial Times. Indeed, arguing about active vs. passive investing is beside the point when looking at the cost of investors who time the market incorrectly.
Across the board of US investment funds, there was a gap of about 1.7% between the average dollar invested in funds and the average funds’ gains, the Morningstar report found, according to the article. In other words, investors are missing out on roughly one-fifth of the average net returns for the funds they’re invested in. That’s a pretty big shortfall, and likely due to “timing costs [which] are a persistent drag on the returns investors earn,” writes Morningstar’s Jeffrey Ptak about the report’s results.
Investors appear to do better by investing in allocation funds, which are structured to be held for a long time and tend to be more diverse and steadier. Likewise, as funds get more volatile, investors tend to make more mistakes, such as going in at the top and then selling off too early if the fund starts to dip. So while the factor investing approach can look appealing to investors with its promise of high returns, most investors should play it safe with steadier funds, the article contends. And even timing the market perfectly doesn’t always result in a win. Third Point precisely timed the market’s 2022 bottom, but then missed out on the tech rally, choosing instead to stick with value stocks that have underperformed this year.
